More signs Ctrip may make an offer for struggling eLong

Leading online travel agent Ctrip.com has just released its latest quarterly results, which show just how fierce competition has become in China’s travel market.

Heavy spending eroded the firm’s profits despite big revenue growth.

That competition was even more evident in the latest results for eLong.com, which was once Ctrip’s main rival but more recently has developed an increasingly cozy relationship with its former foe.

I’ve been predicting for the last few months that Ctrip will ultimately make a buyout bid for eLong, following a steady series of recent moves that were bringing the companies closer together.

The announcement of Ctrip’s and eLong’s latest quarterly results on the same day seems like more than coincidence and is further evidence that a marriage could soon be coming.

But before any formal marriage proposal, Ctrip would also be wise to take a long, hard look at eLong’s financials, which don’t look too impressive.

All that said, let’s take a look at the latest financials coming from a pair of companies that were the two clear early leaders in China’s online travel space when they launched more than a decade ago.

Ctrip has managed to maintain its leading position over that time, and its prowess was on display once more when it reported revenue of 2.53 billion yuan (US$408 million) in the second quarter, up 47 percent from a year ago.

Such strong revenue growth for a company of that size isn’t easy and shows why Ctrip has maintained its leading position despite major challenges from an aggressive group of much younger companies.

But Ctrip’s costs also jumped by an even bigger 50 percent during the quarter, with the result that its profits posted anemic growth or even fell, depending on which number you look at.

Probably the most revealing of those figures was Ctrip’s operating profit, which tumbled by a third to about 61 million yuan for the quarter.

Ctrip’s shares actually rose 4 percent in after-hours trade in New York after the results came out, indicating investor relief that the profit erosion wasn’t bigger.

Losses for eLong

The case was much more grim for eLong, where total revenue tumbled 25 percent to 234 million yuan in its latest quarterly report.

The company’s bottom line was even uglier, with eLong reporting a 356 million yuan net loss for the period versus a profit a year earlier.

The shares rallied by an even bigger 12 percent in after-hours trade. That shows investors were probably expecting even worse and also that they believe a buyout offer from Ctrip could be coming soon.

None of these financials is very encouraging over the short-term and reflect the very real battle that Ctrip is fighting with Qunar, the aggressive, money-losing online travel site backed by online search leader Baidu Inc.

That bloody battle shows no signs of easing any time soon, since both Ctrip and Baidu are drawing on their huge cash resources to try to undercut one another.

That reality could prompt Ctrip to make an offer for eLong as it looks for any advantage it can find to boost its competitive position.

Ctrip bought 37 percent of eLong earlier this year for US$400 million as part of a broader deal in which US travel giant Expedia.com dumped its long-held stake in the laggard company.

More recently, a former Ctrip executive took the helm of eLong.

This release of their earnings reports on the same day reflects growing synchronization between the pair, and is the latest signal that a buyout offer is likely to come soon.

Such a buyout would be easy for Ctrip, which has a huge cash pile of US$3.3 billion — more than six times eLong’s current market value.

I generally think such a purchase looks smart, since Ctrip could quickly consolidate eLong’s poorly performing business with its own profitable operations.

But I would also suggest Ctrip be cautious before making such a bid, since eLong could have many hidden problems in its operations that have led it to become such an industry laggard despite the many advantages it should have enjoyed.

Bottom line: Ctrip is likely to make a buyout offer for eLong by year-end, but its profits will remain under pressure for at least the next year as it battles with Qunar for market share.

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